Talanx Primary Insurance Group

Transcription

1 Primary Credit Analyst: Christian Badorff, Frankfurt (49) ; Secondary Contact: Johannes Bender, Frankfurt (49) ; Table Of Contents Rationale Outlook Base-Case Scenario Company Description Business Risk Profile Financial Risk Profile Other Assessments Support Accounting Considerations Related Criteria And Research JUNE 30,

2 Rationale Business Risk Profile: Strong The group has a strong competitive position thanks to solid market positions in industrial business and retail business in Germany, Poland, and Brazil, and positive diversification by business and geography. We consider that Talanx Primary Insurance Group (TPG) faces intermediate industry and country risk, reflecting our view of exposures in German and international retail and international industrial business. Financial Risk Profile: Very Strong Capital and earnings are very strong, based on our assumption of capital at least in the 'AA' range over The group has an intermediate risk position, based on moderate investment and diversified underwriting risks. Financial flexibility is strong, reflecting proven access to capital markets and healthy financial leverage and fixed charge coverage. Other Factors We view TPG's enterprise risk management as strong. Its management and governance is satisfactory, in our opinion. TPG has exceptional liquidity owing to its highly liquid asset portfolio. We implement a segmented approach when rating the core operating entities of TPG and those of reinsurance subsidiary Hannover Rueck SE (Hannover Re, AA-/Stable/--), although we view Hannover Re as core within the Talanx group. The ratings reflect our view of the group's strong business risk profile and very strong financial risk profile, built on a strong competitive position and very strong capital and earnings. These factors lead to an anchor of 'a' or 'a+' for TPG. We have assigned the 'a+' anchor to TPG given our view of its strong enterprise risk management, and its favorable positioning within our business risk profile due to its strong competitive position. Factors Specific to the Holding Company The rating on holding company Talanx AG is two notches below that on the group's core operating entities, reflecting its position as the majority intermediate management holding company of TPG and its 50.2% stake in Hannover Re. JUNE 30,

3 Outlook: Stable The stable outlook on Germany-based TPG reflects Standard & Poor's Ratings Services' expectation that the group will maintain its strong business risk profile over our forecast horizon. We base our view on its strong competitive position in the three segments in which it operates and its intermediate industry and country risk. We also consider that TPG will maintain very strong capital and earnings and an intermediate risk position. Downside scenario We would consider taking a negative rating action on TPG if its capital and earnings sustainably weakened to lower than very strong levels. This could occur if we observed higher risk capital charges or markedly lower earnings than we currently anticipate in our base case scenario. Upside scenario We might take a positive rating action on TPG if it improved the competitive position of its retail segment in Germany, and it further diversified its business risk profile by significantly widening geographic reach. Base-Case Scenario Macroeconomic Assumptions German government yields will likely moderately increase over the next two-to-three years, but remain below long-term historical norms until at least For more detailed economic assumptions, please see "Credit Conditions: Europe Inches Forward On A Murky Path," published June 9, 2014, on RatingsDirect. Company-Specific Assumptions Annual growth in gross premiums written (GPW) will likely average between 3% and 5% in , mainly on the back of retail international and industrial business lines. We expect annual net profits of 650 million to 800 million in , based on decreasing investment returns and slightly improving technical performance. Capital adequacy should remain at least in the 'AA' range, in our opinion. JUNE 30,

4 Key Metrics --Financial year ending Dec f 2014f Gross premiums written (mil. ) >14,500 >14,000 13,750 12,408 11,194 Net income (mil. ) Return on shareholders' equity (%) P/C net combined ratio (%) Return on embedded value (%) Life new business margin (%) Net investment yield (%) S&P capital adequacy At least very strong At least very strong Extremely strong Extremely strong Very strong Fixed charge coverage * Financial leverage (%) * <20 < NOTE: All figures are for Talanx Primary Insurance Group, unless stated otherwise. *Figures for Talanx Consolidated Group. f--standard & Poor's base-case forecast. P/C--Property/casualty. Company Description Talanx AG is the intermediate management holding company of the Germany-based Talanx Group, which includes TPG and Hannover Re. Talanx Group is the third-largest insurance group in Germany when including the reinsurance business, with 28.2 billion in GPW at year-end TPG reported GPW of 13.8 billion, deriving 41% from property/casualty business and 59% from life insurance activities. TPG is an active acquirer of companies, as its recent purchases of Polish companies Towarzystwo Ubezpieczen i Reasekuracji WARTA S.A.. () and TU Europa S.A. (not rated) demonstrate. The group's structure favors a customer-based focus over a business-line approach. The group operates across the following segments: Industrial lines, retail Germany, retail international, non-life reinsurance, life and health reinsurance, and corporate operations. The group's primary insurance business--tpg--operates in the first three segments. Business Risk Profile: Strong We regard TPG's business risk profile as strong, reflecting the group's strong competitive position and intermediate industry and country risk. Insurance industry and country risk: Intermediate, based on exposure to a variety of industry and country risks TPG faces intermediate industry and country risk, in our opinion. The group is mainly exposed to German property/casualty and life business but has grown significantly in nondomestic markets in recent years. Its largest markets outside of Germany include Poland, Italy, Brazil, the Netherlands, and Austria. Within its dominant domestic market, we believe TPG faces intermediate risk in life insurance and low risk in non-life insurance. Low interest rates continue to squeeze margins on the traditional life insurance portfolio and increase asset-liability management (ALM) risks, particularly at TPG's core subsidiary HDI Lebensversicherung AG (HLV). We also factor in our more favorable JUNE 30,

5 view of the German property/casualty sector, which we consider to be low risk. We regard the group's international, industrial property/casualty lines as intermediate risk because of their higher product risk. Table 1 Talanx Primary Insurance Group Industry And Country Risk Insurance sector IICRA Business mix (%) Germany Life 3 39 International Industrial Insurance 3 26 Germany P/C 2 11 Brazil P/C 3 6 Poland Life 4 5 Italy Life 4 3 Poland P/C 4 3 Turkey P/C 4 1 Mexico P/C 4 1 Italy P/C 4 1 Hungary Life N.A. 1 Netherlands P/C 2 1 France P/C 2 1 Austria P/C 2 0 Weighted IICRA IICRA--Insurance Industry And Country Risk Assessment. P/C--Property/casualty. N.A.--Not available. Competitive position: Strong, because of scale and diversity TPG's competitive position benefits from strong market positions, in particular via its strong position in industrial business, retail Germany, retail Poland, and Brazil. We also view positively the group's diversification in terms of business lines and distribution channels. TPG has taken meaningful steps to strengthen its international diversification in its target growth regions of Central and Eastern Europe and Latin America. Still, we think that with the exception of Poland, the competitive strength of TPG's non-domestic operations is less than that in the domestic market. In industrial lines, we believe TPG benefits from a leading position in the European industrial line business, with global industrial business accounting for 26% of total GPW. TPG has business relationships with most multinational groups in Germany and in Europe, with a high proportion of leading and exclusive mandates. We expect TPG will maintain its market leading position and produce some growth momentum in this segment, which underpins our projected annual growth of 3%-5% in TPG's GPW. In German retail, representing about 46% of total GPW in 2013, TPG operates under the HDI brand to distribute life and non-life products. TPG also has partly exclusive distribution agreements in place with banks to sell life products. These are TARGOBANK, Deutsche Postbank AG, and about 100 members of the widespread network of German savings banks ("Sparkassen"). While the bancassurance approach has provided TPG with strong and sustainable growth and earnings, the non-bancassurance business is experiencing pressure on new business growth, carries relatively high costs, and posts generally weaker earnings. Management has taken action to reduce costs, streamline the product portfolio, and close the duration gap, but these steps will likely not push up growth in the short term. We JUNE 30,

6 consequently expect GPW in the segment to stagnate or slightly decrease over Retail international, contributing about 28% of total GPW in 2013, continues to display strong growth momentum, partly driven by some acquisitions in recent years. Via its purchases of Warta and TU Europa, TPG now has a top 2 market position in Poland, which makes Poland a significant market outside of Germany for the group. TPG's market position elsewhere within the segment is generally smaller but also enables growth potential. We expect this segment to provide TPG with further growth potential. Excluding any potential acquisitions, we expect the group to report average GPW growth rates in the range of 4%-9% over in this segment. Table 2 Talanx Primary Insurance Group Competitive Position --Financial year ended Dec (Mil. ) Gross premiums written (GPW) 13,750 12,408 11,194 10,976 10,527 Change in GPW (%) Net premiums written 10,988 9,854 8,806 8,696 7,943 Change in net premiums written (%) (0.6) Total assets under management 69,778 67,057 58,137 57,576 53,881 Growth in assets under management (%) Reinsurance utilization (%) Business segment (% of GPW) Life Property/casualty Health Other -- (0.4) (0.2) (0.2) (0.0) Financial Risk Profile: Very Strong We view TPG's financial risk profile as very strong, reflecting very strong capital and earnings, an intermediate risk position, and strong financial flexibility. Capital and earnings: Very strong, with earnings funding further growth We view TPG's capital and earnings as very strong, based on our forecast of the group maintaining capital adequacy at least at the 'AA' level over , under our capital model. We derive our forecast of very strong capital adequacy over the rating horizon from our base-case scenario for We include the following assumptions: A slight increase in interest rates; and Premium growth in the 3%-5% range annually. In terms of capital generation, we forecast TPG will maintain sound net profits in the range of 650 million to 800 million annually, of which we assume it will distribute up to 45% as dividends. Under our forecast, we assume property/casualty underwriting profitability will improve over based on our anticipation that natural catastrophe claims in Germany will normalize compared with 2013's. We therefore expect a net combined ratio, the JUNE 30,

7 industry's key profitability metric, in the range of 95%-98% over We also assume continued pressure on investment returns, reflecting an only slight increase in interest rates over our forecast horizon. In life, we think earnings will stagnate against a backdrop of stable net investment yields--at best. We expect growth in the 3%-5% bracket in liability exposures in life and property/casualty. In terms of asset risk exposures, we assume some exposure growth but no material change in the relative composition of asset risks over our projection period. Table 3 Talanx Primary Insurance Group Capital --Financial year ended Dec (Mil. ) Common equity 7,982 8,320 5,925 5,426 5,081 Change in common equity (%) (4.1) Total capital (reported) 9,613 9,853 7,568 7,107 6,503 Change in total capital (reported) (%) (2.4) Table 4 Talanx Primary Insurance Group Earnings --Financial year ended Dec (Mil. ) Total revenues 13,861 12,619 11,520 11,434 11,046 EBIT (reported) 1, Net income Return on total capital (%) Return on shareholders' equity (reported) (%) P/C: Net expense ratio (%) P/C: Net loss ratio (%) P/C: Net combined ratio (%) Operating earnings by segment Industrial Lines Retail Germany (44) 209 Retail International (42) P/C--Property/casualty. Risk position: Intermediate, based on moderate risk investments and diversified underwriting risks In our view, TPG's risk position reflects intermediate risks, benefiting from the diversity of its investment and insurance risks. TPG's asset allocation is heavily geared toward fixed-income investments, with minor equity investments and some exposures to property and alternative investments. Credit risk is limited, with an average rating of 'A' at year-end TPG's fixed-income portfolio continues to be rather concentrated on financial services exposures, partly driven by covered bond investments. JUNE 30,

8 Table 5 Talanx Primary Insurance Group Risk Position --Financial year ended Dec (Mil. ) Total invested assets 69,778 67,057 58,137 57,576 53,881 Change in invested assets (%) Total invested assets adjusted 61,453 59,607 52,069 51,162 48,906 General account invested assets 61,453 59,607 52,069 51,162 48,906 Separate accounts/unit linked assets 8,325 7,451 6,067 6,414 4,975 Net investment income 2,418 2,401 2,183 2,154 2,439 Net investment yield (%) Net investment yield including realized capital gains/(losses) (%) Net investment yield including all gains/(losses) (%) General account invested assets (%) Real estate Investments in affiliates Financial instruments; loans and receivables Loans to affiliates Cash and short-term investments Other investments Financial flexibility: Strong, based on healthy financial leverage and coverage ratios We view Talanx Group's financial flexibility as strong and consider that TPG benefits from this strength. The group has demonstrated access to capital markets through equity and debt issues and we expect this to continue. At year-end 2013, the group's financial leverage ratio (debt plus hybrids to economic capital) was approximately 18% and fixed charge coverage stood at 5x. Based on our capital and earnings forecast and assuming no major change in the group's capital management approach, we expect financial leverage to remain below 20% with fixed charge coverage ratios of 4x-6x. Table 6 Talanx Primary Insurance Group Financial Flexibility* --Financial year ended Dec (x) Fixed charge coverage (x) Financial leverage (%) *Consolidated figures for Talanx Group. Other Assessments Enterprise risk management: Strong We regard TPG's ERM as strong following the recent steps toward a harmonized framework at Talanx Group level. We think TPG is unlikely to experience losses that are in excess of its risk tolerance. ERM is of high importance to the JUNE 30,

9 rating on TPG, which operates in complex and potentially volatile business lines, while being highly exposed to the competitive German insurance market. The major factors supporting our ERM assessment are our positive views on risk management culture, risk controls for the main risks, risk models, and strategic risk management. Talanx Group has developed a groupwide strategic risk management framework with increasingly centralized risk management responsibilities. This is supported by a holistic, and consistent economic capital model--"term"--that the group has deployed to support the risk budgeting allocation process, the limit and threshold system, and business planning through a value based management approach. We assess risk management culture as positive, supported by the enlarged competencies under the chief risk officer and more extensive risk management resources, including a newly created group risk management team and a clear risk management structure between group risk management and local operating entity level. A consistent groupwide risk-management framework is in place. In line with the group strategy, Talanx Group has defined its overall risk appetite and risk tolerances at group and operating entity levels. For the most significant risks, Talanx Group has implemented central management and control through its group risk-management team, and we believe that the sound limit and threshold system will support a consistent risk approach across all local operating entities. We assess strategic risk management as positive. The development of a group model has strengthened the strategic use of risk capital considerations in Talanx Group's value-based management and performance measurement approach. The group also demonstrates a groupwide consistent risk tolerance framework based on an optimized risk budgeting process. Management and governance: Satisfactory TPG's management and governance is satisfactory, in our opinion. The group has a track record of thorough strategic planning, strong management expertise, and conservative and sophisticated financial management. The group has made significant progress in demonstrating the success and effectiveness of its more recent accelerated international retail expansion, but has yet to establish a sustainable turnaround of parts of its German retail business. Liquidity: Exceptional TPG's liquidity benefits from the strength of its diverse liquidity sources, mainly premium income, and an asset portfolio that contains about 52 billion in liquid assets. There are no refinancing concerns, and we believe the group capable of managing unexpectedly large claims or an increase in life insurance policy lapses. Support Group support Within the Talanx Group, we take a segmented rating approach toward the primary insurance operations (TPG) and reinsurance (Hannover Re) operations. We regard both entities as core within the Talanx Group. Despite its operational independence, Hannover Re is, in our view, core to the group because of its strategic role and size. The ratings on Hannover Re are therefore underpinned by the financial strength of the core primary insurance entities of the Talanx Group. The combination of Hannover Re's core status and its relative operating independence means that, under our current rating methodology, the ratings on Hannover Re will not fall below those on the core operating JUNE 30,

10 entities of the Talanx Group and could remain up to two notches higher. Accounting Considerations We mainly base our assessment of TPG on its annual financial statements, where we focus on the three primary insurance segments retail Germany, retail international, and industrial lines, supplemented by non-public information on the life and property/casualty segments and a consolidated view on TPG. Our assessment of financial flexibility relies on consolidated group figures rather than on TPG data only. In our ratings on domestic and non-domestic subsidiaries of the group, our analysis is based on annual reports under local generally accepted accounting practices and International Financial Reporting Standards. Related Criteria And Research Insurers: Rating Methodology, May 7, 2013 Group Rating Methodology, Nov. 19, 2013 Enterprise Risk Management, May 7, 2013 Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 Use Of CreditWatch And Outlooks, Sept 14, 2009 Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008 Ratings Detail (As Of June 30, 2014) Holding Company: Talanx AG Junior Subordinated Senior Unsecured A- Operating Companies Covered By This Report Talanx Primary Insurance Group HDI-Gerling America Insurance Co. HDI-Gerling Industrie Versicherung AG Subordinated A- HDI-Gerling Welt Service AG A-/Stable/-- BBB JUNE 30,

11 Ratings Detail (As Of June 30, 2014) (cont.) HDI Haftpflichtverband der Deutschen Industrie VaG HDI Lebensversicherung AG Junior Subordinated A- HDI Versicherung AG Neue Leben Lebensversicherung AG PB Lebensversicherung AG TARGO Lebensversicherung AG Towarzystwo Ubezpieczen i Reasekuracji WARTA S.A. Domicile A/Stable/-- A/Stable/-- Germany *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Additional Contact: Insurance Ratings Europe; InsuranceInteractive_Europe@standardandpoors.com JUNE 30,

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